Zimbabwe’s government, which banned use of the dollar nine months ago, has restored the peg its currency had to the greenback due to a scarcity of foreign exchange.
The southern African nation faces shortages of fuel, power and food because it can’t afford to pay for the imports. The worst drought in 40 years means the government needs to import 1 million tons of corn to keep its people from starving.
“This intervention takes into account the country’s limited access to foreign finance, which is adversely affecting the country’s balance of payments,” John Mangudya, the central bank’s governor, said in a statement after a meeting of the monetary policy committee. The bank also reduced its key rate to 25% from 35%.
The decision represents a climbdown for the government of President Emmerson Mnangagwa, who had insisted that banning the dollar, legally in use since 2009, was necessary to restore financial stability. Instead, the economy is in its worst state since 2008 and is experiencing hyper-inflation.
The situation has been exacerbated by the coronavirus pandemic, which is roiling markets globally.
The bank said it had adopted a fixed exchange rate of 25 Zimbabwe dollars per U.S dollar and suspended an electronic trading system it adopted earlier this month. It abandoned its previous peg which kept the local unit at parity with the dollar in February last year.
On the streets of the capital, Harare, U.S dollars were changing hands at nearly double the official bank rate at 44.8 per U.S, according to marketwatch.co.zw, a local website that tracks black market rates.
John Robertson, an economist at Robertson Economics, said the return of the Zimbabwe dollar did not have the buy-in and trust of citizens and this was reflected in the about-turn. Hyperinflation in 2008 destroyed the value of the local currency and saw the use of the American currency legalized the next year.
“The Zimbabwe dollar still isn’t trusted,” said Robertson by phone from from Harare. “All this shows a lack of confidence. They are fixing one rate and one keeps on moving.”